Relevant Life Insurance and HMRC: What the Rules Actually Say

If you're a company director with life cover already in place, there's a reasonable chance you've never checked which pension it's actually classed under, or whether it needs to be at all. That's not a criticism, it's simply not the kind of thing directors are trained to think about, and it's rarely explained clearly when a policy is set up.

But if you have a relevant life policy, understanding its relationship with pension rules matters, particularly the abolition of the pension Lifetime Allowance in April 2024 and what replaced it.

What the Lifetime Allowance used to do

Before April 2024, the pension Lifetime Allowance capped the total amount you could hold across all your registered pension schemes without triggering an additional tax charge. Death benefits paid from registered pension schemes, including many death in service policies, counted towards this allowance.

For directors and senior employees with substantial pension provision, a large death in service payout could push their estate over the Lifetime Allowance, triggering a tax charge on the excess. This was a genuine planning consideration for higher earners with generous group life cover.

Why relevant life policies were never affected

Relevant life insurance was specifically designed to sit outside registered pension scheme benefits entirely. It isn't a pension death benefit. It's a standalone life insurance policy written into an individual discretionary trust, structured under different HMRC rules from registered pension schemes.

This meant that even when the Lifetime Allowance was in full force, a relevant life policy payout never counted towards it. Directors with relevant life cover could hold significant pension provision and still take out substantial life insurance through their company without pushing themselves towards a Lifetime Allowance tax charge.

This was one of the genuine planning advantages of relevant life over other death benefit structures for higher earners, though it was often a secondary consideration behind the core corporation tax relief and no Benefit in Kind treatment.

What changed in April 2024

The pension Lifetime Allowance was abolished on 6 April 2024. It no longer exists as a concept in UK pension law. In its place, HMRC introduced two new allowances that govern how much can be taken from registered pension schemes without an income tax charge:

The Lump Sum Allowance, which caps tax-free lump sums taken during your lifetime, and the Lump Sum and Death Benefit Allowance, which caps the total tax-free lump sums that can be paid both during your lifetime and on death.

These new allowances apply to registered pension scheme benefits. Because a relevant life policy was never a registered pension scheme benefit in the first place, this change doesn't alter its position at all. The policy sits outside this framework exactly as it did before, just as the framework itself has changed shape around it.

Why this distinction still matters today

For directors with significant pension pots, or those planning around the new Lump Sum and Death Benefit Allowance, it remains genuinely useful to know that a relevant life policy doesn't interact with these limits at all. It's a separate pool of protection, funded by the company, sitting entirely outside the pension tax framework.

This means a director can maximise their pension contributions up to the available allowances, and separately hold a relevant life policy for family protection, without one affecting the tax treatment of the other. For business owners layering multiple forms of protection and pension planning, understanding which pots interact with which allowances is part of getting the overall structure right.

The bottom line

The Lifetime Allowance is gone, replaced by the Lump Sum Allowance and the Lump Sum and Death Benefit Allowance. Relevant life policies were never part of that framework before the change and aren't part of the new one either. If you hold a relevant life policy, or are considering one alongside pension planning, this is one less interaction to worry about, not because the rules changed in your favour, but because they were never relevant to this type of policy to begin with.

Written by

Alex Ogden DipFA | Director | Executive Life

Alex Ogden DipFA holds the Level 4 Diploma for Financial Advisers (DipFA) awarded by the London Institute of Banking & Finance (LIBF), the FCA's benchmark qualification for retail investment advisers. He is authorised by the FCA, Ref: AJO01072. View the FCA register entry.

Tax rates and thresholds are subject to change.